They are never-ending, it seems: proposals to create a form of nationwide mandatory retirement savings. A recent article at Third Way lists some of the newer ones, and proposes its own. Forbes contributor Teresa Ghilarducci has been promoting what she has alternately been calling Guaranteed Retirement Accounts or the Retirement Savings Plan. I have my own pet solution with mandatory retirement savings as an integrated part of a Social Security reform. Some of these proposals require employees to contribute their own earnings, others require employer contributions, and yet others require both.
And, as it happens, any such program would not have to start from scratch. It would not be innovative or especially unusual — if you take an international perspective. A year ago, I profiled the retirement system in the United Kingdom. Hong Kong and a number of Asian countries have what they call “provident funds.” And Australia has a system they call Superannuation, in which all employers are required to contribute 9.5% of an employee’s pay into a retirement fund.
Now, there’s a lot to say about this system and other systems outside the United States but I want to focus in this article on one specific issue: how did they get from here to there? 9.5% of income is a lot, and that contribution rate has to be understood in the context of an overall state pension system that’s much different than ours. But there is one element of their experience that I think is very useful to consider: what happens when a mandatory contribution (for retirement savings, or a new payroll tax for maternity leave, or something else) appears out of nowhere?
One gets the impression that many supporters of new taxes, especially when directly employer-paid, believe that employers have a secret stash of money somewhere that they’ll be persuaded to cough up, or that they’ll cut executive pay as needed. The wiser, but more trivial answer to any such tax hike is “it all ultimately comes out of worker pay.”
And in the case of Australia more specifically, worker pay increases were effectively directed into Superannuation contributions, with a slow phase in starting at 3% in the program’s first year and increasing one percentage point every other year to 9% in 2002. The further increase to 9.5% likewise happened in two steps, to 9.25% in 2014 and 9.5% in 2015.
But even this didn’t come from nowhere; Australia’s larger companies had long offered retirement savings programs to their workers, but only on a limited basis. At the same time, unions played a much more significant role in the Australian economy, and negotiated wages not just for one employer at a time but for entire sectors. In 1986, a time of relatively high inflation, the Australian government orchestrated an agreement for a wage increase of 6% for those covered by these wage agreements, with the stipulation that half of that increase would take the form of a 3% retirement savings contribution. (See “Mandatory Retirement Saving in Australia” by Hazel Bateman and John Piggott for a history of the system.)
To ensure access to Superannuation contributions even for those employees outside the union wage agreement system, the government mandated contributions for all employees in 1992. Here’s an account of the politics behind the change:
‘Wages were due to go up 3 per cent that year and he ([Prime Minister] Paul Keating) wanted to restrain inflation,’ [economics reporter] Mr [Peter] Martin says. ‘Of course he still wanted to give workers the wage rise, so he and Bill Kelty, the head of the Australian Council of Trade Unions, came to a deal that employers will have to give the workers 3 per cent, they just won’t be able to spend it. And so that was the deal, that all awards had to give employees 3 per cent of their salary paid not as salary but into superannuation funds.’
And again, it was acknowledged that the mandated superannuation contributions were not coming out of employers’ pockets but were a redirecting of employee wage increases; so long as those pay increases exceed inflation, workers are no worse off in terms of living standards but accumulate retirement savings they otherwise might not have. Another article, from Australian-based The Conversation, reports that recent renewed discussions around further increases in the contribution rate up to as high as 15% are based on the belief by supporters that employers are unfairly withholding wage increases, so that mandated increases in Super contributions are a way to force employers to grant this increase — though the author, Brendan Coates, disputes this, since, so long as nominal wages grow due to inflation, employers can implement Super contribution increases out of this nominal pay increase without having to cut pay.
In this respect, what Australia did as a country is not all that different from the savings strategy being promoted for American workers, who are encouraged, when they receive a raise, to use that money to increase their savings rather than just boost their spending. It’s the same principle that underlies the concept of “auto-escalation” in 401(k) accounts, when employers design the accounts so that, having first automatically enrolled their employees at a certain contribution rate when they are hired, the amounts those employees contribute increase each year at the same time as that year’s raises are processed, so that employees increase their savings without seeing a reduction in their take-home pay. (See this description at US News.)
The bottom line is this: if American workers’ wages rise above inflation, then mandating that some of that increase be directed to retirement savings might well be a pain-free way to achieve a long-held goal. But that’s not a sure thing.
What do you think? (Besides, “hey, write a snazzier title!”) Let me know at JaneTheActuary.com!